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DSME6651 Economics Analytics

Homework #1

1. Gasoline is used in the production of many products including cars. Suppose the price of gasoline increases due to a war in Mid East. What happens to the equilibrium price and equilibrium quantity in the market for traditional cars? Draw demand and supply curve to show the event. Make sure you show the shift of the curve(s) and label out all the important things in the graph.

2. Consider a market with the following demand and supply curves:

Demand: Qd = 500 − 2P

Supply: Qs = −60 + 5P

a. Compute the equilibrium price and quantity.

b. Graph the demand and supply curves. Illustrate on the graph the equilibrium price and quantity. Calculate the consumer surplus and the producer surplus.

c. Assume a per-unit tax of 14 is imposed. Calculate the equilibrium price paid by buyers, price received by sellers, and quantity and illustrate them in the graph you draw in part b. Calculate the deadweight loss.

3. Suppose the government passes a minimum wage of $14 per hour in the labor market where the labor supply is Qs = 15W (W is hourly pay) and the demand for labor is Qd =240 – 5W.

a. What is the equilibrium wage and quantity of labor hired BEFORE the change? 

b. Draw the demand and supply curves. How large will the surplus be?

c. If we try to achieve the highest efficiency (largest total surplus) under this minimum wage, what is the deadweight loss? Show it in the graph.

4. Externality can be positive. For example, when you take vaccination, besides protecting yourself, you can also reduce the chances that your family and friends will get sick. Suppose the demand for Covid-19 vaccination is given by Qd = 3,000 − 2P. If the government does not intervene the market, the supply is Qs = 1,000 + 3P. The external benefit on bystanders is measured to be 500 per unit. The social value of vaccination would the private value for whoever gets the shot plus the external benefit. (Hint: compare with what we learned about negative externality to do the analysis.)

a. If we allow a free market, how many units of vaccination will be traded at the equilibrium?

b. What is the socially optimal quantity of vaccination shots?

c. What can the government do to reach the socially optimal vaccination level?